1. PPI PENSIONS POLICY INSTITUTE Introduction to the UK Pensions Framework Chris Curry Research Director, Pensions Policy Institute www.pensionspolicyinstitute.org.uk ©PPI 2007

2. PPI PENSIONS POLICY INSTITUTE What is a pension? World Bank definition The three main goals of pensions systems are: Redistribution from the rich to the poor to prevent poverty in old age Providing a savings vehicle to allow individuals to redistribute across their own lifetime to avoid poverty in old age Providing i nsurance as a social safety net for those who become unable to work

3. PPI PENSIONS POLICY INSTITUTE 3 What should the role of the state be? 1. Alleviation of poverty 2. Prevention of poverty 3. Belonging and participation in the community 4. Continuance of economic status

4. PPI PENSIONS POLICY INSTITUTE The UK pension system Tier 1 State Tier 2 State Unfunded Contributory or (different) credits Compulsory for most employees Tier 3 Private, tax incentivised Funded Contributory Voluntary BSP: Basic State Pension S2P: State Second Pension Previously SERPS Occupational and personal pensions Pension Credit = Guarantee Credit + Savings Credit State Means-tested Contracting -out Unfunded Contributory or credits Compulsory for most workers

5. PPI PENSIONS POLICY INSTITUTE The UK state pension and benefits system is complex 23 benefits for pensioners; 36 linkages between them

6. PPI PENSIONS POLICY INSTITUTE The First Tier: Basic State Pension (BSP) BSP is contributory (not universal) Not everyone receives the full amount of £84.25 How much you get depends on how many years you ‘qualify’ For a full pension a man needs to qualify for 44 years, a woman for 39 You can qualify each year through earning enough (including self-employed), receiving certain benefits (unemployment or disability) Years spent caring man you need less years to qualify for a full pension If you do not qualify in your own right you can claim a pension through your husband

7. PPI PENSIONS POLICY INSTITUTE The First Tier: Basic State Pension (BSP) Millions Earning enough24.2 Caring for children1.7 Other caring0.1 Other credits4.4 Not qualifying 4.7 13% Number of working age people accruing a qualifying year for BSP under the current system UK, 2004/5

8. PPI PENSIONS POLICY INSTITUTE The First Tier: Basic State Pension (BSP) Proportion of pensioners receiving less than the full amount of Basic State Pension (BSP) as at 31 March 2004 Men Women Pensioners receiving less than the full BSP 10.2%50.9% Pensioners receiving less than 75 per cent of the full BSP 2.9%42.7%

9. PPI PENSIONS POLICY INSTITUTE The First Tier: Pension Credit (PC) Pension Credit is means-tested: the amount you get depends how much other income and savings you have. There are two parts: Guarantee Credit (GC) and Savings Credit (SC) GC tops income up to £114 a week (£174 for couples) SC is a ‘reward for saving’ – for every £1 of income above the BSP level, 60p of SC is paid. This is withdrawn for every £1 of income above the GC level PC has to be claimed: currently between 61% and 69% of those entitled claim

10. PPI PENSIONS POLICY INSTITUTE The First Tier: Pension Credit (PC) Number of claimants by component being received (000’s) GC onlyGC + SCSC onlyTotal PC Women4253359481,709 Men3502633951,009 Total7765991,3432,717 Number of Pension Credit claimants (overall and by component being received), May 2006

11. PPI PENSIONS POLICY INSTITUTE The Second Tier: State Second Pension (S2P) S2P is contributory How much you get depends on how many years you ‘qualify’ and how much you earn in that year You can qualify each year through earning enough (NOT including self-employed), receiving disability benefits or caring If earnings are low, or qualification is through caring or disability a minimum flat-rate is awarded Higher earners receive a higher pension Fewer people are covered each year than for BSP

12. PPI PENSIONS POLICY INSTITUTE The Second Tier: State Second Pension (S2P) Millions Earning enough21.7 Credits3.7 Not qualifying 9.6 27% Number of working age people accruing a qualifying year for S2P under the current system, UK, 2004/5

13. PPI PENSIONS POLICY INSTITUTE The Second Tier: Contracting-out Some or all of S2P can be provided through a private pension rather than the state Part of your NI contribution is paid to a private pension Less S2P is paid by the state The amount from the private pension could be more or less than the amount you would have got from the state

14. PPI PENSIONS POLICY INSTITUTE The Second Tier: Contracting-out

15. PPI PENSIONS POLICY INSTITUTE The Third Tier: Private Pensions Private pensions can be provided through an employer or arranged individually Pensions can be Defined Benefit (DB) or Defined Contribution (DC) There are (generous) limits on the amount than can be contributed to a pension and the total size of a pension Most pension must be taken as an income – though 25% can be taken as a tax-free lump sum Pensions have to be taken between age 50 (55 from 2010) and 75

16. PPI PENSIONS POLICY INSTITUTE The Third Tier: Private Pensions Proportion of working-age people currently accruing a non-state pension (2004/5)[